OLDWICK, N.J.--(BUSINESS WIRE)--Aug 7, 2018--The U.S. health insurance industry’s invested assets have grown at a sizable pace over the last decade, averaging nearly 8% annually, with some shifts into non-traditional asset classes, according to a new A.M. Best report.

The Best’s Special Report, titled, “Health Insurance Companies Expanding Investment Options,” notes that the challenging low interest rate environment has compelled health carriers to consider non-traditional asset classes as a means to incrementally bolster overall investment returns Invested assets in aggregate for the health industry increased to $296.2 billion in 2017 from $151.2 billion in 2008. The top five organizations account for 44% of the segment’s invested assets, while the top 10 account for 56%, which is largely made up of publicly traded companies and Blue Cross/Blue Shield branded organizations. While investment income has fluctuated over the last 10 years, its contribution to net operating gains has been fairly range-bound, hovering around one-quarter. Health carriers have been tweaking their bond portfolios in ways not done before as a means of increasing yield.

The share of bond portfolio allocations to NAIC-2 rated bonds has more than doubled since 2008, to 15.7% at year-end 2017. While the companies with the largest bond portfolios have seen the most dramatic movement, this transition has been across the segment. More than 60% of all companies within the segment have increased their NAIC-2 bond allocations since 2013, at least partially driven by an increase in bank security holdings. Health carriers also have increasingly been looking to invest new money in private placement bonds. The industry has nearly doubled its allocation private placement bonds since 2013, with a 10.1% increase in investments in 2017. Schedule BA assets, which are viewed as high risk, nearly doubled to 5.1% of overall allocations in 2017 from 2.7% in 2009.

Overall, A.M. Best has a negative view on the rising share of higher risk assets for health insurance companies. Growing exposure to multiple riskier asset classes—joint ventures, lower-rated fixed income, private placements—create increased potential for losses and pressure on the capital. For the majority of carriers, this concern is mitigated through more than sufficient levels of risk-adjusted capitalization and liquidity. In addition, A.M. Best notes that compared with past periods, many carriers have become more sophisticated in the area of investment allocation and overall balance sheet risk management. However, the last several years have showed that health insurance carriers should be ready to face a higher degree of uncertainty and the potential for legislative/regulatory events with short notice and a possible negative impact on financial results. A.M. Best will continue to monitor asset allocations of health insurance companies and evaluate the impact on their balance sheets in the context of overall risk management.